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The dust of the recent economic implosion has yet to settle. Capital assets and fortunes have been dreamed up, liquidated and lost more times than any industrial-size paper shredder can handle in a lifetime. For years to come, analysts and investors will bear the burden of having ignored the high debt loads of many of the now-fallen giants of technology, and former executives and employees of now-defunct companies will continue to battle in the courts. CEO tenure has gone from eight years in 1980 to four years in 2000,1 even as the media and the public have hotly debated whether corporate returns have kept up with hyperbolic CEO pay.2 Meanwhile, the number of business failures has increased — more than 80,000 company failures per year in the last 20 years, compared to 19,000 per year, on average, in the previous 30 years.3,4 And corporations seem less and less able to predict their true earnings.5

Not surprisingly, in this environment investors and other corporate stakeholders have begun to take a keen interest in the sustainability of businesses. Witness the growth of socially responsible investing, where economic as well as social and environmental goals drive investment decisions. Although analysts may not always speak the language of sustainable development, Wall Street is gradually becoming aware of the importance of measurement and disclosure of nonfinancial elements of a business. For example, 50% of oil and gas industry analysts surveyed by Cap Gemini Ernst & Young confirmed that regulatory compliance on environmental issues, community service and lawsuits do indeed affect the value of a company; 68% believe that intangibles related to employees also have significant impact.6 In part in response to this demand, more companies have taken to filing corporate sustainability reports — The New York Times reports that 487 were published in 2001, up from 194 in 1995 and seven in 1990.7

Yet the word “sustainability” remains ambiguous and politically charged, particularly within the lexicon of business.

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About the Author

Karina Funk is a manager at the Cap Gemini Ernst & Young Center for Business Innovation. She may be contacted at FunkK@alum.mit.edu.

References

1. For Fortune 300 companies’ CEOs, average tenure was eight years in 1980, compared to four years in 2000. T. Neff and D. Ogden, “Anatomy of a CEO,” Chief Executive (February 2000): 30–32.

2. For example, Forbes.com reported that 36% of CEOs at large companies in the United States, who have held the position for three years or less, have delivered annualized total returns of 15% or more to shareholders, in A. Gillies, “Short Tenures, Big Returns,” Forbes.com, April 29, 2002. By contrast, the Institute for Policy Studies and United for a Fair Economy report that the CEOs of the 23 large companies under investigation for accounting irregularities earned 70% more from 1999–2001 than the average of CEOs among large companies, while shares of these companies lost 73% of their total value. See S. Klinger, C. Hartman, S. Anderson, J. Cavanagh and H. Sklar, “Executive Excess 2001: CEOs Cook the Books, Skewer the Rest of Us,” Ninth Annual CEO Compensation Survey, Institute for Policy Studies and United for a Fair Economy, August 26, 2002, 1.

3. Cap Gemini Ernst & Young Center for Business Innovation analysis (September 2002), with data from Council of Economic Advisors, “Economic Report of the President” (Washington, D.C.: GPO, 2000), 431.

4. The failure rate per 10,000 listed businesses has dramatically increased, rising from 43, from 1953 to 1979, to 91, from 1980 to 1997. See E. Mankin and P. Chakrabarti, “Valuing Adaptability: Financial Markers for Managing Volatility,” Perspectives on Business Innovation, Cap Gemini Ernst & Young Center for Business Innovation, in press.

5. As evidence, the number of S&P 500 companies taking special charges (for restructuring charges, inventory write-downs and asset write-downs) has increased more than fourfold, from 68 in 1982 to more than 300 in 2001. Source: Cap Gemini Ernst & Young Center for Business Innovation analysis (August 2002).

15. A debate against Porter’s claim of “the innovation-stimulating effect of regulation” casts doubt on the assumption that regulation would offer the possibility of a “free lunch,” in part because “there is considerable doubt as to whether regulators would know more about these better methods of production than firm managers.” For this reference and an extended discussion, see A.B. Jaffe, S.R. Peterson, P.R. Portney and R.N. Stavins, “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature 33 (March 1995): 132–163.

17. Ibid. A challenge put forth by Jackson Robinson, a Spartech director and president of Winslow Management, which does environmental investing.

18. Reinhardt, “Bringing the Environment Down to Earth,” 150.

19. Author interview with Robert Larson, Office of Transportation and Air Quality, U.S. Environmental Protection Agency, October 11, 2002.

20. U.S. Department of Treasury, “United States Treasury Secretary Paul H. O’Neill Remarks to the Harvard Business School” (Washington, D.C.: Office of Public Affairs, October 17, 2002), which can be accessed at http://www.treas.gov/press/releases/po3549.htm.

25. Laws in Europe, Japan, and in some U.S. localities require some manufacturers to take back their products from consumers or to set up easily accessible collection systems for disposal, reuse or recycling.

28. For more on this argument in the context of product service systems, see M. Wong, “Industrial Sustainability (IS) and Product Service Systems (PSS): A Strategic Decision Support Tool for Consumer Goods Firms” (first-year Ph.D. report, Cambridge University, Department of Engineering, Manufacturing and Management, 2001).

30. For more information, see “The Fast 50: Trendsetters,” Fast Company, March 2002, also available at http://www.fastcompany.com/ fast50/2001/winners.html.

i. Three Cap Gemini Ernst & Young studies contributed to the VCI: “Measures That Matter” (1996); “Success Factors in the IPO Transformation Process” (1998, 2001); “Decisions That Matter” (2001). These studies are available at www.cbi.cgey.com. More details on CGE&Y’s body of work on intangibles valuation is available in J. Low and P.C. Kalafut, “Invisible Advantage: How Intangibles Are Driving Business Performance” (Cambridge, Massachusetts: Perseus, 2002).

ii. For a fuller explanation of the VCI energy, utilities and chemicals industries’ models, see C.B. Cobb, “Measuring What Matters: Value Creation Indices for the Energy, Utilities and Chemical Industries,” Perspectives on Business Innovation, Cap Gemini Ernst & Young Center for Business Innovation, in press. Also available at www.cbi.cgey.com.

Acknowledgments

The author would like to thank Jonathan Low, Prabal Chakrabarti, Jonathan Robinson and Pam Cohen Kalafut on the Intangibles team at Cap Gemini Ernst & Young, as well as all named as references who contributed by way of personal communication. This article also benefited from the comments of two anonymous reviewers. All remaining errors and omissions are the author’s alone.